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Strategic Sovereign Defaults under International Sanctions

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  • Carlo de Bassa Scheresberg, Francesco Passarelli

Abstract

Sanctions induce political instability. We present a model where sanctioned regimes may decide to repudiate their public debts in order to keep internal support. To be effective, this strategy requires the share of foreign debt to be larger than the minimum quota of population which is needed for regime support. Combining the data we highlight that more than a third of all sovereign debt crises in the 1970-2001 period are connected to an international sanction episode. To rule out endogeneities, we propose an innovative instrumental variable based on foreign policy cycles. Results confirm that sovereign defaults reduce sanctions' destabilizing impact. When the scope for internal financial transfers is particularly narrow, debt repudiation releases resources for public spending, invalidating chances of overthrow. Lastly, we report evidence of sizeable anticipation effects which contradict the enforcement theory: high chances of receiving sanctions in the future imply a current 20% rise in probability of strategic default.

Suggested Citation

  • Carlo de Bassa Scheresberg, Francesco Passarelli, 2011. "Strategic Sovereign Defaults under International Sanctions," ISLA Working Papers 42, ISLA, Centre for research on Latin American Studies and Transition Economies, Universita' Bocconi, Milano, Italy.
  • Handle: RePEc:slp:islawp:islawp42
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    References listed on IDEAS

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    More about this item

    Keywords

    sovereing debt default; strategic default; sanctions;

    JEL classification:

    • H63 - Public Economics - - National Budget, Deficit, and Debt - - - Debt; Debt Management; Sovereign Debt
    • H12 - Public Economics - - Structure and Scope of Government - - - Crisis Management
    • D78 - Microeconomics - - Analysis of Collective Decision-Making - - - Positive Analysis of Policy Formulation and Implementation

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